Startups often need funding to get up and running or gain additional traction. Generally, the best way to do that without giving up ownership of your company is to get a startup business loan.

However, qualifying for a business loan can be challenging, especially for new startups without significant revenues or business credit history. 

Here’s a step-by-step guide to help you navigate the process, plus some alternative financing options you may want to consider.

Step 1: Determine Your Funding Needs

For better or worse, you have countless business loan providers to choose from nowadays, each with different loan terms and qualification requirements. Naturally, many of them will be unsuitable for your situation.

Before applying for anything, weed out some of those options by asking yourself:

• How much capital do I need?
• How soon do I need the funds?

Having definitive answers to these questions narrows down your potential financing options considerably. It’ll also help reveal what next steps you can take to improve your chances of getting a loan.

For example, say you determine that you need $40,000 within the next two months or your overhead will force you out of business. 

You won’t have time to significantly improve your credit or finances and probably have to take whatever loan you can get.

Next, imagine instead that you want $200,000 in equipment financing to help scale your operation, but you can afford to wait a year or two before pulling the trigger.

It may be harder to qualify for the higher loan amount, but you have significantly more time to work on your application. You can build credit, grow your revenues, and shop around before settling down on your best offer.

Step 2: Check Your Credit Scores and Reports

Your current creditworthiness is another factor to consider when narrowing down your potential startup financing options. After all, if you can’t realistically qualify for an account, it isn’t a viable choice.

Here are some business credit scores your lenders are likely to check that you should make sure to review:

• Dun & Bradstreet’s PAYDEX Score
• Experian’s Intelliscore Plus
• FICO’s Small Business Scoring Service (SBSS)
• Equifax’s Business Delinquency Scoring Service (BDSS)
• PayNet’s MasterScore

Even though your goal is to apply for business financing, you should also look at your personal credit scores and reports. Business lenders usually consider personal credit during underwriting, especially for less established companies.

You’ll typically have to use multiple service providers to access all the credit information you need. 

Step 3: Project Your Repayment Capacity

One final factor you should consider before choosing a funding option is the cash flow you expect to have available for servicing your debt. The last thing you want is to get a startup loan only to realize you can’t afford your monthly payments.

Roughly 38% of failed startups cite burning through their capital as a primary reason for going out of business, and defaulting on a small business loan can be disastrous, especially if you sign a personal guarantee.

Not only will your company almost inevitably fail, but your business and personal credit scores will suffer significantly, and your lender will be able to collect by pursuing your personal assets.

To avoid that, create a detailed business plan for how you intend to put your funds to work. Use it to generate a conservative estimate of your future revenues, expenses, and net cash flow available for debt service.

Step 4: Choose Accounts to Pursue

At this point, you should have a good understanding of your funding needs, timeline, credit scores, and capacity for debt payments. That’s everything you need to know to choose from the many small business loans available.

Three popular sources of financing for startups include:

• Online alternative lenders: If you own a brand new startup or have bad credit, online lenders may be your only financing option. They tend to have lower qualification requirements. Unfortunately, they also usually tend to have higher interest rates and fees.
• Traditional financial institutions: If you own a well-established business with good credit, banks and credit unions will offer you better terms than online lenders. Their loans are harder to qualify for but are often well worth the trouble.
• Small Business Administration (SBA) lenders: Getting an SBA loan can be even more laborious than applying for a loan from the average traditional lender, but it’ll have the lowest possible interest rate, highest loan amount, and longest loan term.

It’s best to go after conventional bank and SBA loans whenever you can. Even if you can’t qualify for one currently, it’s often worth waiting to apply until you’ve improved your credit and finances.

Step 5: Improve Your Credit as Much as Possible

If you need financing as soon as possible to keep your startup afloat, there’s only so much you can do to improve your chances of qualifying for an affordable business loan.

However, if you can wait a few months or more for your capital, you can drastically improve the strength of your applications by raising your personal and business credit scores.

In most cases, the best way to improve your personal credit is to make your monthly payments on time and pay down your debt balances. Your payment history and amounts owed are worth 35% and 30% of your FICO scores, respectively.

Conversely, most startups with poor credit simply don’t have enough business credit history. As a result, the best way to improve your business scores is often to focus on acquiring a diverse set of vendor and financial tradelines.

Vendor tradelines refer to the credit accounts you get from other businesses, such as net 30 accounts from suppliers. They’re relatively easy to qualify for, even for new businesses.

Meanwhile, financial tradelines are the loans and lines of credit you get from creditors. They’re harder to qualify for, but there are some accessible ones you can use to build business credit as a new startup.

For example, CreditStrong offers credit builder loans for businesses that will show up in your credit reports as a financial tradeline. Because we use your loan proceeds as collateral, we don’t have to check your personal or business credit.

All you need to be eligible for an account is to be in business for at least three months, have a physical U.S. address, operate as a corporation, partnership, or limited liability company (LLC), and have an Employer Identification Number (EIN). Give it a try today!

Step 6: Apply With Multiple Lenders

Once you’ve prepared your credit and finances as best as you can, make sure you apply to a few different lenders. You don’t want to waste time pursuing accounts you have no chance of qualifying for, but you should always shop around to some degree.

In addition to having a better chance of receiving a loan, it’ll give you the opportunity to compare multiple offers and negotiate from a stronger position. Whichever type of account you choose, try to target roughly three to five lenders.

What Are the Requirements for a Startup Business Loan?

Unfortunately, there are no universal requirements for a startup business loan. Eligibility specifications vary significantly between lenders, and you may find that you qualify for some accounts and not others.

However, you’ll find that they tend to consider the same criteria, which include the following:

• Time in business
• Annual revenues
• Personal and business credit scores

Generally, the more restrictive a lender is, the more likely their loan terms are to be favorable. And remember, online lenders tend to be the most flexible, while traditional institutions and SBA lenders tend to be stricter.

For example, OnDeck, an online lender, requires one year in business, $100,000 in annual revenues, and a 600 personal FICO score to get a loan.

Meanwhile, you need two years in business and $100,000 in annual revenues to get a business loan from Bank of America. They don’t provide minimum FICO scores, but you generally need a good or excellent score for a bank loan, which starts at around 700.

Alternatives to a Startup Business Loan

Business loans are a great form of financing for many startups, but they’re far from the only option for a small business owner. In fact, there are many other types of debt you can use to get the funds you need without resorting to equity financing.

If business loans don’t quite meet your financing needs or you fear that you won’t be able to qualify for one, here are some alternative options to consider.

Business Credit Cards

Business credit cards usually won’t help you finance anything for more than a month, but they’re still a valuable account to have. In fact, they have significant advantages over small business loans in some circumstances.

For example, business credit cards can help you:

• Separate your personal and business transactions
• Generate renewable working capital to smooth out cash flows
• Earn cash back rewards that discount your purchases

Most importantly, it’s typically easier to get a business credit card than a small business loan using your personal credit score. You can then use the financial tradeline to help build your business credit scores and work up to a bigger loan.

Personal Loans

Generally, a small business loan is the best type of term loan for financing your startup. They typically have the highest available principal balances, longest repayment terms, and lowest interest rates.

However, a personal loan is usually easier to get, and you can often use the funds for business purposes. They’re a viable alternative if you can’t qualify for a business line, especially if you have good personal credit. 

However, make sure you tell your prospective lenders that you intend to use the funds for your business before applying. Personal loans are among the most versatile forms of financing, but some lenders prohibit you from using the funds for business.

Crowdfunding

Crowdfunding refers to several forms of financing that involve receiving a little bit of capital from many different parties. Both debt and equity crowdfunding options exist, so you have some additional flexibility if you go this route.

The primary advantage of crowdfunding is that it’s often easier to convince people to lend or invest when they don’t have to contribute much, as their risk is inherently lower.

Unfortunately, the platforms that support crowdfunding often take a significant portion of your funds for their services. As a result, crowdfunding can be a relatively expensive form of financing.

Venture Capital

Unlike business startup loans, venture capital is a form of equity financing. It involves selling shares to a venture capital firm and requires giving up a percentage of your ownership of the company.

If you don’t mind making that sacrifice, venture capital has some significant advantages. Not only do you avoid taking on fixed debt payments, but you also get support from expert investors who scale companies like yours for a living.

Venture capitalists use funds from wealthy investors and investment banks to buy shares of companies with high growth potential and can be instrumental in scaling your business.

Friends and Family

You may be reluctant to borrow from friends and family for fear of jeopardizing your personal relationships, but they can still be a great way to get your startup off the ground.

Because they’re more inclined to care about your wellbeing than a business lender, it’s often easier to convince friends and family to help you out, and they’ll likely give you a better deal.

If you’re confident in yourself and your business, getting startup funding from your personal connections can be a win-win. You can get financing for your company while generating a return for people you care about.

Conclusion

Getting a business loan is a great way to fund your startup, but it’s not possible or optimal in every situation. The best lenders have significant qualification requirements, and you may not have the time to jump through all the necessary hoops.

Fortunately, there are plenty of other financing options out there for startups. If you can’t quite qualify for a business loan, keep an open mind and consider the alternatives discussed above.

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